ADVANCE STEEL TUBES LTD.,KOLKATA vs. DCIT, CIR-3, KOLKATA, KOLKATA

The captioned appeal filed by the assessee, pertaining to assessment year 2010-11, is directed against the order passed by the ld. Commissioner of Income Tax (Appeals)–1, Kolkata, in Appeal No.107/CIT(A)-1/C-3/2013-14 dated 31.12.2014 which in turn arises out of an order passed by the AO u/s.143(3) of the Income Tax Act 1961, (hereinafter referred to as the ‘Act’) dated 01.03.2013.

The grounds of appeal raised by the assessee are as follows: 1) For that the learned Commissioner of Income Tax (Appeals) should have accepted the contention of the assessee that disallowance on interest payment of Rs.22,80,000/- which was covered u/s.40A(2)(a) made by the Assessing Officer was illegal and he acted wrongly in confirming the disallowance on alleged grounds.

The brief facts qua the issue are that during the assessment proceedings, on perusal of the balance sheet of the assessee company, it was observed by the assessing officer that the assessee company has taken loan of Rs.1.20 crore from M/s Marda Commercial and holding Limited @10% interest, which came in the ambit of the provisions of section 40A(2)(a) of the I.T Act. The assessee has also given loans and advances of Rs.2.43 crore to M/s. Pir Panchal Construction (P) Ltd. – Joint Venture. The notice u/s.133(6) was issued to both the parties and on perusal of the replies received, it was noticed by the AO that out of Rs.2.43 crore loan given to M/s Pir Panchal, an amount of Rs.1.90 crore was remained an interest free loan. Further, the assessee company itself has taken unsecured loan from M/s. Marda Commercial and Holding Limited. Therefore, the AO noted that the said advances were given without any commercial expediency. Had the said amount been paid to the parties from whom secured and unsecured loan was taken, the profit of the assessee company could have been higher. The assessee explained to AO that the said amount was invested in the joint venture, under J.V Agreement but AO noted that the balance sheet of the assessee does not show investment therefore, AO held that the interest @12% should be disallowed. Therefore, an amount equal to 12% of Rs.1.90, that is, Rs.22,80,000/- was disallowed out of the interest debited in the profit and loss account.

Aggrieved by the addition made by the AO, the assessee filed an appeal before the ld. CIT(A) who has confirmed the addition made by the AO. During the appellate proceedings the assessee submitted that the amount of Rs.1.90 Crores contributed to the Joint Venture by the Assessee as interest free advance was nothing but capital contribution of the Assessee for the Joint Page | 2 Advance Steel Tubes Ltd. Assessment Year: 2010-11 Venture from which it could be eligible for 25% of the net profits. Further that the capital contribution had been done out of the internal funds of the Assessee and its reserves and surplus were to the extent of Rs.47,25,09,026/-.Therefore there was no question of the borrowed funds of the company being utilized for the same. The ld CIT(A) observed that the Assessee's explanation regarding contribution of funds in the case of Pir Panchal Construction (P) Ltd. cannot be considered as the Assessee had borrowed fund from Marda Commercial & Holding Ltd, to the extent of Rs.1.9 crores. There was no justification submitted by the assessee regarding the business purpose or business requirement of such funds. The ld CIT(A) noted that the Assessee has advanced funds to the Joint Venture claiming the same to be capital contribution in the Joint Venture. However the same has been shown as advance and not Share Application or Share Capital in the Joint Venture Company. Therefore it is clear that while on one hand the Assessee is paying interest to a sister concern, it has also providing interest free advance to another concern in which it is interested, i.e. Pir Panchal Construction (P) Ltd. The Assessee's contention and the case laws cited by it were in respect of claim of interest u/s.36 (1)(iii) of the Act, however here the issue is in respect of interest payment covered uls.40A(2)(a) which is the specific provision. Therefore, ld CIT(A) did not accept the submissions of the Assessee and held that the AO was justified in disallowing the interest charged to the P&L A/c. However, the ld. CIT(A) restricted to the amount covered u/s.40A(2)(a), i.e. payment made as interest to Marda Commercial & Holding Ltd. Rs.22,66,250/-.

Not being satisfied with the order of ld CIT(A), the assessee is in further appeal before us. The ld DR for the Revenue relied on the stand taken by the Assessing officer. On the other hand, ld Counsel for the assessee reiterated the submissions already made before the Assessing Officer and CIT(A).

We have given a careful consideration to the rival submissions,we note that the amount of Rs.1.90 Crores contributed to the Joint Venture by the Assessee as interest free advance was nothing but capital contribution of the Page | 3 Advance Steel Tubes Ltd. Assessment Year: 2010-11 Assessee for the Joint Venture from which it could be eligible for 25% of the net profits. Further that the capital contribution had been done out of the internal funds of the Assessee and its reserves and surplus were to the extent of Rs.47,25,09,026/-. Therefore, there was no question of the borrowed funds of the assessee being utilized for the same and this is for the business purpose. If there be interest-free funds available to an assessee sufficient to meet its loans and advances so made by him, and at the same time the assessee had raised a loan it would be presumed that the loans and advances were from the interest-free funds available with the assessee. The assessing officer and CIT(A) could not establish any link that the said loan was out of interest bearing funds. The loans were given to the Joint Venture by the assessee is out of its Own Funds and, therefore, assessee is entitled to claim deduction under Section 36(1)(iii) of the Act.We also note that the issue under consideration is identical to the facts which were considered by the Hon`ble Supreme Court Of India, in the case of S.A. BUILDERS LTD. 288 ITR 01, wherein it was held that the assessee borrowed the fund from the bank and lent some of it to its sister-concern (a subsidiary) on interest- free loan. The test in such a case is really whether this was done as a measure of commercial expediency. The decisions relating to s. 37 will also be applicable to s. 36(1)(iii) because in s. 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to s. 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The High Court as well as the Tribunal and other IT authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest-free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under Page | 4